Financial News: ETF provider likes social media

MikeFoster

A U.S.-based firm has applied for regulatory approval to launch an exchange traded fund that will invest in social networking stocks even though it has yet to construct the index that will guide its purchases.

In its filing to the Securities & Exchange Commission, Global X Funds, a leading provider of niche ETFs, said it wants to offer investors a way to buy into listed social media, file-sharing and web-based media application stocks typified by business networking site LinkedIn.

The launch of the ETF comes as a number of technology firms are looking to carry out initial public offerings.

LinkedIn carried out a $405 million listing in May, while internet games provider Zynga and discount network Groupon are among others planning flotations. Zynga valued itself at $11 billion in a March filing, while Groupon's filing valued it at between $20 billion and $30 billion. However, their prospects for a successful listing may have been impacted by this month's stock market shakeout.

The best-known social networking company, Facebook, has yet to make its intentions clear on a flotation, although there is increasing speculation it will carry out a listing next year.

Global X's proposed social media ETF would invest in stocks in line with their weighting in a proposed index called Solactive Social Media, which is being compiled by a German developer called Structured Solutions, whose products manage around $8 billion-worth of ETFs.

Global X was not available to comment further than its filing at the time of going to press, but according to Sebastian Seifried, head of indices at Structured Solutions, Global X wanted to get its application in early as the SEC takes at least 75 days to approve an ETF. This is despite the nascent nature of its chosen index, which provides index-based solutions for ETFs and structured products, principally marketed through banks.

Seifried added Global X wanted to use an index comprising at least 20 stocks to reassure the Securities & Exchange Commission, the U.S. regulator.

He said Structured Solutions already runs an index comprising 10 to 11 social media companies, used by Societe Generale for one of its structured products.

He said: "We need about 20 stocks to achieve the right balance to get regulatory approval for a US product, although we are confident there will soon be a sufficient number, as IPOs come on stream."

He said that another way to construct an index suitable for US regulatory purposes would be to make the social media index more broadly defined.

According to the filing for the Global X social media ETF, up to 20% of the Global X fund will be invested in swap-based arrangements, the maximum permitted under SEC rules. The rest will be invested in social media stocks across the world, weighted for size.

However, if the fund gets off the ground, the ride for investors could be bumpy.

The filing warns: "Social media companies may be smaller and less experienced companies, with limited product lines, markets or financial resources and fewer experienced management or marketing personnel.

"Technology company stocks, particularly those involved with the internet, have experienced extreme price and volume fluctuations that often have been unrelated to their operating performance."

Global X is a leading provider of niche ETFs that covers the automobile, fishing, food and waste management sectors. Others invest in commodities like gold, aluminium, uranium, potash and lithium. They hark back to a series of niche structured products, known as investment certificates, which were popular with investors during the credit boom.

Niche ETFs tend not to be large, although there are exceptions. Last Friday, State Street Global Advisor's SPDR gold ETF overtook its S&P 500 equivalent to become the largest ETF on the U.S. market, valued at $77.5 billion.

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